The transfer balance cap which limits the amount of capital that can be transferred into a tax-exempt retirement phase will not increase for the 2024–2025 income year, based on the release of December 2023 consumer price index (CPI) numbers from the Australian Bureau of Statistics (ABS). This means the figure will remain at $1.9 million for the 2023–2024 and 2024–2025 income years. Where an individual exceeds their personal transfer balance cap, the excess is required to be commuted and excess transfer balance tax needs to be paid.
The transfer balance cap was originally introduced in 2017 as a way to limit the amount of capital that can be transferred into a tax-exempt retirement phase. This was implemented in response to criticism that the superannuation system was being used by the wealthy for estate planning purposes rather than for retirement, and that the soaring cost of tax concessions for fund members threatened the sustainability of the entire super system.
As originally introduced, the transfer balance cap was set at $1.6 million; however, indexation applied to the general transfer balance cap from 1 July 2021 in line with the CPI in $100,000 increments. As a result, the current transfer balance cap for the 2023–2024 income year is $1.9 million. Based on the release of CPI index numbers from the ABS, this figure of $1.9 million will also apply for the 2024-25 income year, as the CPI figure for December 2023 was not large enough to trigger a $100,000 increase.
It should be noted that the transfer balance cap is a lifetime limit on the amount an individual can transfer into one or more retirement phase accounts. Individuals will have a personal transfer balance cap equal to the general transfer balance cap when a retirement phase income stream is commenced for the first time. For example, if an individual commences a retirement stream in the 2024–2025 income year, their personal transfer balance cap will be $1.9 million.
According to the Association of Super Funds Australia (ASFA), the lump sum needed at retirement to support a comfortable lifestyle is $690,000 for a couple or $595,000 for a single person (assuming a partial Age Pension). Therefore, a personal transfer balance of $1.9 million, where an individual can transfer that amount into a retirement phase and have the earnings on the assets be tax-free, would support a more-than-comfortable lifestyle.
For individuals who started their retirement phase income stream in an earlier year with a lower general transfer balance cap, if the full amount of the personal transfer balance cap was never used, proportional indexing may apply. This means the individual’s personal transfer balance cap will be indexed based on the highest ever balance in the transfer balance account.
Example
Grace started a retirement phase income stream with a value of $595,000 on 1 January 2022, when the general transfer balance cap was $1.7 million. Assuming no other movements in her transfer balance account, the unused cap percentage is $595,000/$1.7 million = 0.35 or 35%, meaning Grace is using 35% of the cap.
Her unused cap percentage is therefore 100% – 35% = 65%.
Grace’s personal transfer balance cap will then be indexed by 65% of the increment it has increased by. The cap for the 2023–2024 and 2024–2025 years is $1.9 million, so that increment is $200,000 ($1.9 million – $1.7 million); and $200,000 × 65% = $130,000
All of this means that Grace’s personal transfer balance cap for either the 2023–2024 or the 2024–2025 income year will be $1.83 million ($1.7 million original transfer balance cap + $130,000 indexation).
It should be noted that if Grace commenced a retirement income stream to the value of $1.7 million on 1 January 2022, she would not now be entitled to any indexation as the value of her income stream equalled the general transfer balance cap at the time the stream commenced. This would be the case even if she commuted the pension, in part or in full.
Where an individual exceeds their personal transfer balance cap, the excess is required to be commuted and excess transfer balance tax needs to be paid. The ATO will generally send out an excess transfer balance determination to advise taxpayers who have exceeded their personal transfer balance. Among other things, the determination will set out the due date for commutation. Once the excess is removed, the ATO will send an excess transfer balance tax assessment indicating the amount of excess transfer balance tax owed.
Source: Transfer balance account - Check your transfer balance account to see what your super funds have reported and your personal transfer balance cap
Calculating your personal transfer balance cap